Basel bank watchdog has 'mixed feelings' on super SIV

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Published: Oct 23, 2007 8:46 a.m. ET

Last Updated: Oct 23, 2007 8:55 a.m. ET

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WASHINGTON (Dow Jones)--The world's top banking overseer has reservations about the $100 billion rescue package planned by U.S. banks and believes U.S. banks could be temporarily at a competitive disadvantage to their foreign rivals because of the slowed implementation of new capital requirements.

Nout Wellink, the chairman of the Basel Committee on Banking Supervision who is also president of the Dutch central bank and a member of the European Central Bank's Governing Council, discussed the recent credit-market turmoil with Joellen Perry of The Wall Street Journal and Damian Paletta of Dow Jones Newswires.

WSJ/Dow Jones: What are your thoughts about this new superconduit that's been proposed?

Wellink: For the time being, I have mixed feelings. ...What is exactly the idea behind it? Is it a way of escaping your fate? Because if there is no market, at a certain price, then you're confronted with losses. Take these losses. ...As long as it's meant to create an orderly process, okay. But if these artificial elements are involved, then immediately the supervisor and the central banker uses the phrase moral hazard.

European banks are not the least interested to participate in this project. This is an American initiative, and it's the banks who created, themselves, these mortgage problems. So the European banks, they look from a certain distance.

WSJ/Dow Jones: European banks are scheduled to implement the new Basel II international capital standards on January 1, 2008, a year before U.S. banks. Could this give them a competitive advantage over U.S. banks, who won't implement the standards until 2009?

Wellink: You might have competitive advantages under turbulent circumstances ...my smiling Japanese colleagues tell me that by introducing Basel 2, the Japanese banking system is suffering less at this very moment. (Japanese regulators implemented Basel II in March, well before European and U.S. regulators.)

WSJ/Dow Jones: What, since the credit-market turmoil began on Aug. 9, have we learned about the adequacy of the Basel 2 requirements?

Wellink: A number of issues we've been confronted with recently are issues that are solved, to a large extent, by the Basel 2 regulations. This holds for the conduits, for example. This holds for credit lines.

Basel 2 is an important step in the right direction. It's not perfect ... It's not the ultimate wisdom. We will, on the basis of present recent experiences reflect on whether it's in all respects the right answer. And there will be refinements. To my mind, there's no doubt about that.

And in the meantime, to use a simple example: if all banks would have taken into account in their risk management the existence of conduits, it would have been different already. This was not the case in all parts of the world, but I know from our experience that these banks had no problems whatsoever.

WSJ/Dow Jones: Could you be a bit more specific about the kinds of refinements that might take place? Might Basel II's reliance on rating agencies, for instance, come under consideration?

Wellink: We want to learn lessons from the present crisis. In the past, we've given certain weights to different things, but it might be that as a consequence of, for example, our experience with conduits and credit lines that we have to come to a conclusions that perhaps a different weight could be given to this or that.

There are problems to be solved with rating agencies...but you remain responsible at the end of the day, yourself, and you have to make your own assessments.

WSJ/Dow Jones: Is it possible to have uniform standards for liquidity like there are uniform standards for capital?

Wellink: My ultimate goal is not by definition to harmonize everything in the world. But the crucial (standards) for liquidity management, especially for cross-border banks, should be harmonized. (But) it's a long way, I'm afraid. We created (a working group last year), and they will report on their activities to us in December, and then we will have a discussion.

One should (also) realize that up till now we could cope, more or less, with the present situation. Banks had to absorb very substantial amounts of taking back onto their balance sheet. It's not ideal ... but having said that, they could cope with it till now.

WSJ/Dow Jones: There are those in the central banking community who feel that the ECB's own actions since August 9 have been providing a certain kind of encouragement to moral hazard, an ex post insurance.

Wellink: Yes, I know, one of the colleagues has said that, a colleague from the U.K. And then a real moral hazard situation emerged in the U.K. itself. I don't think that what we as central bankers are doing is a moral hazard in that we are not rescuing specific institutions and therefore not giving stimuli to other institutions to "misbehave" in the future. We're just contributing to the smooth functioning of the financial markets. And we withdraw immediately our support and actions the moment markets are going to function again.

WSJ/Dow Jones: Euro-zone money markets are still out of whack, with three-month rates still very high.

Wellink: The longer end is still a problem. The reintermediation process (of banks taking losses back onto their books) will continue. And that's why it will take some time before we are completely back to normal.

(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

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